If you’ve been keeping careful records all year and have no fear of forms, you may feel pretty relaxed this time of year. But if this is the first time you’re putting taxes together for your freelance work, you may be dreading April.
To help you get through this tax season and in the future, consider the following tips.
1. Be aware of what taxes you’re responsible for.
You owe taxes on the profit of your business — your total income minus your expenses. Obviously, the total percentage depends on how much income you make overall, but you can expect to payout 20–30% of your income as a rough estimate. Check out the IRS’s Self-Employed Individuals Tax Center to get a clearer picture of how much will be due.
Why so much? “In addition to income tax, freelancers are required to pay self-employment tax. If you’ve earned as little as $400, you’ll have to pay that tax, even if income tax is not required,” explains William Lipovsky, owner of the personal finance website, First Quarter Finance. Yeah, that means since you are your own boss, you’re now double-taxed as both an employer and an employee when you’re self-employed.
2. Keep your clients on track when it comes to 1099s.
“If you make $600 or more from any one client, you must report the income on your personal tax return using the 1099-MISC form that each client should provide to you with a listing of how much they have paid you for the year,” explains Jonathan Medows, a New York City based CPA.
However, if you have not received a 1099 from a client with billings of more than $600 by February 2 of this year, you need to follow up with them and request one. Remember, even if you don’t receive one you’re not excused from reporting that income; just add up your invoices for the year and submit it. And don’t forget to file 1099-Misc if you hired other freelancers to work for you.
3. Keep on top of tax payments due throughout the year.
Your self-employment taxes are due at the same time as your regular taxes: April 15. If you’re planning to continue picking up freelance work, you will also need to pay in quarterly estimated taxes, sadly starting that same day. So on April 15, you’re not only required to pay taxes on last year’s income, you’re also required to pay taxes on any self-employment income earned from January 1–March 31 of this year.
Throughout the rest of the year, be sure that you are putting money aside from every freelance payment you receive. This simple practice will make finding the money to pay quarterly estimated taxes on April 15, June 15, September 15, and January 15 much easier.
Alternatively, if you are like many freelancers making their living with a mix of jobs, one or more of which may come with a W-2, you may be able to avoid paying estimated taxes simply by increasing your withholding at your W-2 job(s). For instance, if you normally claim 2 or 1 on your W-4, then reduce it to 1 or 0 to have more taxes taken out of your paycheck, making the quarterly payments unnecessary.
Looking for more information on quarterly taxes? Check out this full guide.
4. Take advantage of deductions and business expenses.
Tax write-offs! The very phrase can bring a smile to the lips of even the most stoic freelance professional. But remember, the IRS is pretty suspicious of these deductions so it is important to be aware of the rules regarding them and make sure you have receipts to back them up! And only deduct the portion of those expenses that relates to your business.
“For example, to qualify for a home office deduction the room you consider a home office, it must be used solely for business-related activities. If you do have a dedicated home office, you can also deduct a portion of household expenses like mortgage interest, rent, utilities, and insurance based on what percentage of the square footage of your home is made up by your office,” says Medows.
Here are some common self-employment deductions:
Home office or co-working space
- Freelance business website
- Telephone and internet expenses
- Apps and online tools (like Moonlighting)
- Office supplies
5. Commit to solid recordkeeping.
If you’re scrambling this tax season to put your hands on all of the receipts for your expenses and the records related to your income and tax payments, it’s time to set up a solid record-keeping system going forward — it will save you time and stress in the long run.
Consider investing in tools like Quickbooks Self-Employed to help you categorize expenses, track mileage, and save receipts so that managing your books and taxes are a snap.
6. If you’re still struggling, enlist help.
If you’re spending valuable billable time struggling to calculate your taxes — or you don’t have time to do them — then hiring a CPA (especially one that specializes in freelance businesses) can be well worth the money. A good CPA will be able to ensure that you are taking advantage of all possible tax deductions and credits and give you advice on how to structure your business and personal finances to lower your future tax bills. Plus, a CPA’s professional fees are tax deductible, so the benefit you’ll receive from working with a tax and financial expert will far outweigh the cost.